A financing client I’ve worked with for many years asked a difficult question last week. He is contemplating turning his keys in on a home he purchased 6 years ago as part of his retirement plan. His main concern how a foreclosure or short sale would impact his credit & if he really needed to be concerned about that with the number of people in situations like his.
For retirement planning purposes, he purchased this home and planned on big appreciation to make up for lost savings in the “Dot Com Bust” of 2000 & 2001. The property value increased, he refinanced taking out cash to purchase two more properties. He had a high leverage, high appreciation plan.
My answer was he did need to be concerned and that he would loose between 100 & 150 points in credit score. Repairing this score will not happen quickly and for a period of at least 7 - 10 years my client will have less access to credit with increased expense for the credit he does get. This in turn will negatively impact his ability to acquire additional financed assets he might use for retirement.
Although he called to discuss one property, he will soon need to address the other two which are high cost as well. This strategy works well in rapidly appreciating markets which never last as long as normal or down market.
He would have done much better moving his profits to a lower leveraged property that could carry itself in any market. That would have been a most powerful move. Also, the financing on low leverage properties is slowly retired as tenants make their rent payments which increases equity.